Summary:
Short-sellers are being accused of deliberately "bear raiding" financial services firms with the aim of push the price lower in the hope of triggering a raft of further selling and extending their profits. These accusations (typically by executives seeing their share price drop) are heard often in declining markets. Banks particularly susceptible to loss of confidence. Governments are introducing regulation to limit the practice. Evidence that practice has shifted from being merely a hedging strategy to a full-fledged investment activity.Short-sellers decry double standards: okay to buy company long and go on TV and ramp the shares all you like without anyone saying anything, but as soon as you short you're allegedly spreading false rumours and a danger to the whole financial system. (Published: 22/06/08)
Notes:
- short selling
- borrowing shares, selling them immediately, when price falls they are bought back and returned to the owner; difference between revenue from sale and price of buying them back is profit
- risky: if prices go up, however, a loss is incurred
- practice has long been used as a hedging strategy aimed at protecting "long" investors against the risk that prices fall and they lose money
- long investors: those who own stock in a company
- "Longs" take out small short positions so they can profit whichever way the market goes.
- others - mostly hedge funds - may "short" a stock simply because they see it as overvalued and due for a correction
- Short-selling is the single most popular hedge fund strategy, with long/short funds accounting for more than 40 per cent of the total $2,800bn invested in hedge funds.
- Over the past 10 years, long/short funds have produced slightly higher returns than the average hedge fund, according to Hedge Fund Research.
- technique has been around for about 400 years
- has been blamed for almost every market decline since and many difficulties encountered by individual companies; short-sellers were accused of
- bringing about the crash of the Dutch tulip market in the 17th century
- the Wall Street crash of 1929
- this year, for helping to bring down Bear Stearns, the New York investment bank
- concern about short-selling tends to escalate when markets decline
- executives blaming short-sellers for spreading inaccurate rumours that caused their shares to plunge
- issue is particularly sensitive right now because the most popular targets are banks
- banks are susceptible to a loss of confidence in a way that industrial companies are not
- Bear Stearns collapsed largely because other institutions stopped doing business with it, fearing it might be in trouble
- In the months before its fall, levels of short-selling in the company hit a record high - and this fact was widely known
- In recent weeks, financial services companies on three continents have been under siege from short-sellers.
- e.g. in London, shares in HBOS, the UK's largest mortgage lender, have dipped below its planned rights issue price of 275p
- prompted suspicions of a deliberate "bear raid" by short-sellers aiming to push the price below that level in the hope of triggering a raft of further selling and extending their profits
- Many countries are introducing tighter regulation
- moves come partly in response to a sharp increase in the practice as it has shifted from being merely a hedging strategy to a full-fledged investment activity
- late 2007 the US Securities and Exchange Commission introduced rules prohibiting short-selling during a company's initial public offering
- this month: UK's Financial Services Authority unexpectedly announced disclosure rules for anyone shorting stock in a company while it undertakes a rights issue
- any investor holding short positions in more than 0.25 per cent of stock in a company conducting a rights issue would have to own up to it
- India and several other Asian countries have restricted short-selling this year
- Arturo Bris (IMD):
- "This is the concern of regulators. Once short-selling becomes a profit-making strategy, it brings new risks to the market."
- Although more than 90 per cent of the world's stock can technically be shorted, in practice only a certain proportion of shares in a company is usually available to be borrowed.
- complaints about short-sellers fall roughly into two camps:
- specific allegations about their motivations
- an inchoate unease about the very idea of betting against a company's success.
- shorters are accused of preying on companies and driving down their stock through collusion, issuing negative research to manipulate the stock and spreading rumours
- these activities are in any event illegal
- short-sellers complain of a double standard:
- why should a view that a company's shares are likely to fall be inherently less valid, and more worthy of suspicion, than a view that the shares will rise?
- Arturo Bris: "This sort of market manipulation is no more characteristic of short-sellers than of bullish investors."
- typical short-seller: short-seller says: "I can buy GE long and go on TV and ramp the shares all I like and no one says anything, but as soon as I short I am spreading false rumours and a danger to the whole financial system? It doesn't add up."
- Short-sellers are frequently more rigorous and detailed in their research than long-only fund managers.
- That is in part because they need to be clever stock-pickers.
- Because markets rise over the long term, a short-seller needs to go against the tide.
